Treasuries Fall Most Since Start of Year as Refuge Demand Eases

By Daniel Kruger -
Jan 26, 2013

Treasury 10-year note yields rose
the most since the first week of the year as the European
Central Bank said banks will repay more of its loans than
forecast and a strengthening housing market reduced the haven
appeal of U.S. government debt.

The benchmark security fell the most since Oct. 17
yesterday after the ECB data spurred optimism the worst of the
European debt crisis may be over, capping the biggest weekly
decline since the five days ended Jan. 4. The slide in prices
came before the first Federal Reserve policy meeting of the year
beginning Jan. 29 and the release of the January employment
report on Feb. 1. The U.S. will also auction $99 billion in two-
, five- and seven-year notes next week.

“It’s been a global risk-on trade,” said Christopher Sullivan, who oversees $2.1 billion as chief investment officer
at United Nations Federal Credit Union in New York. The ECB data
“is certainly regarded as a favorable indicator,” Sullivan
said. “We’ve entered a higher range in Treasury yields.”

The 10-year note yield rose 11 basis points, or 0.11
percentage point, to 1.95 percent, according to Bloomberg Bond
Trader pricing. The 1.625 percent security due in November 2022
declined 30/32, or $9.38 per $1,000 face amount, to 97 3/32.

The 10-year note is likely to trade in a range with yields
between 1.80 percent and 2.06 percent, Sullivan said.

Yesterday’s selloff surpassed the eight-basis-point rise in
yields posted on Jan. 2, when Congress broke an impasse about
how to avert the so-called fiscal cliff by passing legislation
skirting income-tax increases for more than 99 percent of
households. The U.S. House of Representatives voted on Jan. 23
to temporarily suspend the nation’s borrowing limit.

European Relief

The ECB said banks will pay back 137.2 billion euros
($184.4 billion) of its three-year loans, so-called Longer-Term
Refinancing Operations, next week. That compares with the median
forecast of 84 billion euros in a Bloomberg News survey of
economists.

The Frankfurt-based ECB flooded financial markets with two
tranches of three-year loans a year ago to avert a credit crunch
after banks stopped lending because of Europe’s sovereign-debt
crisis. This was the first opportunity for early repayment by
the banks.

“Banks can repay weekly now, so it should have a risk-on
effect in the near term,” said Craig Collins, managing director
of rates trading at Bank of Montreal in London. Treasury “rates
are going to go higher.”

Bond Buying

The Fed is holding a policy meeting for the first time
since committing to buy $45 billion a month in Treasury
securities at its previous gathering Dec. 12.

The 10-year note yield rose to a 7-month-high on Jan. 3
after minutes of the December meeting showed that participants
disagreed on how long the Fed should continue its purchases,
spurring speculation the central bank could end the stimulus
program earlier than many investors anticipate.

Policy makers were “approximately evenly divided” between
participants who said it would be appropriate to end the
purchases around mid-2013 and those who said they should
continue beyond that date.

Fed officials are gathering as the property market has
shown signs of recovery and homebuilding has rebounded as low
borrowing costs spur buyer demand. Builders sold 367,000 homes
in 2012, the most in three years and the first annual increase
in seven, Commerce Department figures showed yesterday.

“We think the housing recovery is going to continue,”
said Thomas Simons, a government-debt economist in New York at
Jefferies Group Inc., one of 21 primary dealers that trade with
the Fed. “The long end has been selling off.”

Employment Growth

Claims for jobless benefits fell to a five-year low for a
second week. The Labor Department will say Feb. 1 that the
economy added 155,000 jobs this month, according to the median
estimate of forecasters in a Bloomberg News survey. The
unemployment rate is expected to remain at 7.8 percent.

The Federal Open Market Committee said in December that
interest rates will stay low “at least as long” as the jobless
rate stays above 6.5 percent and if inflation is no more than
2.5 percent.

Treasuries returned 2.2 percent in 2012, versus 11 percent
for bonds in an index of investment-grade and high-yield
securities, according to Bank of America Merrill Lynch data.
Company debt gained 6.8 percent in 2011, 11 percent in 2010 and
26 percent in 2009, the figures show.

The U.S. sold $15 billion of Treasury Inflation-Protected
Securities on Jan. 24 at a yield of negative 0.63 percent, the
highest since May. The past seven offerings of the securities,
beginning in November 2011, have been sold with negative yields.

Treasury will auction $35 billion in two-year notes, an
equal amount in five-year notes and $29 billion in seven-year
notes on three consecutive days starting Jan. 28.